Career Opportunities in Managerial Finance

-
Career Opportunities in Managerial Finance:

Managerial Finance Function:

  • People in all areas of responsibility within the firm must interact with finance personnel and procedures to get their jobs done. For financial personnel to make useful forecasts and decisions, they must be willing and able to talk to individuals in other areas of the firm.
ORGANIZATION OF THE FINANCE FUNCTION:
  • The size and importance of the managerial finance function depends on the size of the firm.
  • In small firms, the finance function is generally performed by the accounting department.
  • As a firm grows, the finance function typically evolves into a separate department linked directly to the company president or CEO through the chief financial officer (CFO).

RELATIONSHIP TO ECONOMICS:

  • The field of finance is closely related to economics.
  • Financial managers must understand the economic framework and be alert to the consequences of varying levels of economic activity and changes in economic policy.
  • They must also be able to use economic theories as guidelines for efficient business operation.
  • Marginal cost-benefit analysis is the economic principle that states that financial decisions should be made and actions are taken only when the added benefits exceed the added costs.

Marginal cost-benefit analysis can be illustrated using the following simple example:

Ali is a financial manager for Noor Department Stores, a large chain of upscale department stores operating primarily in the western United States. She is currently trying to decide whether to replace one of the firm’s computer servers with a new, more sophisticated one that would both speed processing and handle a larger volume of transactions. The new computer would require a cash outlay of Rs 8,000, and the old computer could be sold to a net Rs 2,000. The total benefits from the new server (measured in today’s Rupees) would be Rs10,000. The benefits over a similar time from the old computer Rupees) would be Rs3,000. Applying marginal cost-benefit analysis, Jamie organizes the data as follows:

Benefits with new computer                Rs 10,000

Less: Benefits with old computer      Rs 3,000                                                                                             (1) Marginal (added) benefits           Rs 7,000

Cost of new computer                             Rs 8,000

Less: Proceeds from the sale of old computer Rs 2,000                                                               

 (2) Marginal (added) costs                    Rs 6,000

          Net benefit [(1) - (2)]                     Rs 1,000

ACCOUNTING RELATIONSHIP:

  • The firm’s finance and accounting activities are closely related and generally overlap.
  •  In small firms accountants often carry out the finance function, and in large firms, financial analysts often help compile accounting information.
  • One major difference in perspective and emphasis between finance and accounting is that accountants generally use the accrual method while in finance, the focus is on cash flows.
  • Whether a firm earns a profit or experiences a loss, it must have a sufficient flow of cash to meet its obligations as they come due.

The significance of this difference can be illustrated using the following simple example:

The Noor Corporation experienced the following activity last year:

Sales   Rs 100,000 (1 yacht sold, 100% still uncollected) 

Cost  Rs 80,000    (all paid in full under          supplier terms)    


Now contrast the differences in performance under the accounting method (accrual basis) versus the financial view (cash basis):

Income Statement Summary

                                                  Accrual basis                     Cash basis 

Sales                                            Rs 100,000                            Rs 0

Less: Costs                                    (80,000)                             (80,000)

Net Profit/(Loss)                            Rs 20,000                      Rs (80,000)

Finance and accounting also differ concerning decision-making:

  1. Accountants devote most of their attention to the collection and presentation of financial data.
  2. Financial managers evaluate the accounting statements, develop additional data, and make decisions based on their assessment of the associated returns and risks.

Financial Activities Primary activities of the financial manager:



Comments

Post a Comment

Popular posts from this blog

Risk of a Single Asset

-
Image
 Risk of a Single Asset: The concept of risk can be developed by first considering a single asset held in isolation. We can look at expected-return behaviors to assess risk, and statistics can be used to measure it.  Risk Assessment: Sensitivity Analysis (Scenario Analysis) and Probability Distributions can be used to assess the general level of risk embodied in a given asset. Sensitivity Analysis: Sensitivity analysis uses several possible-return estimates to obtain a sense of the variability among outcomes. One common method involves making pessimistic (worst), most likely (expected), and optimistic (best) estimates of the returns associated with a given asset. In this case, the asset’s risk can be measured by the range of returns. The range is found by subtracting the pessimistic outcome from the optimistic outcome. The greater the range, the more variability, or risk, the asset is said to have. Although the use of sensitivity analysis and the range is rather crude, it does...
Read more

Secured Bond

-
Image
What are Secured Bonds? A secured bond is a  bond  that requires the issuer to pledge specific assets as collateral in the case of default. Secured bonds are usually more popular with businesses or governments that are less likely to be able to pay their debts in the future. Interest on these bonds isn’t enough to attract investors. Companies and local governments will less than stellar past financial track records usually need to assure inventors that they will not default on their future principle and interest payments. And if they do default, ensure the investors don’t walk away empty handed.   Example A good example of a local government that will probably need to issue secured bonds in the future is the city of Detroit. Since its 2013 bankruptcy, its difficult to believe an investor would want to put his or her money at risk purchasing a bond issued by the city of Detroit. I doubt it will ever be able to issue a bond without having some kind of secured collateral agr...
Read more

Types of Corporates bonds

-
Image
Types of Corporates bonds:  There are five basic categories of corporate bonds: public utilities, transportations, industrials, banks and finance companies, and international issues. The five categories can be further broken down. For example, the transportation category includes airlines, railroads, and trucking companies. Security of bonds Security for bonds suggests some kind of underlying asset that backs up the issue. This is preferable for investors, as it provides risk protection against a potential corporate  default . Assets backing the bond provide security beyond the credit of the issuer. M ortgage bond A mortgage bond is a secured bond issued by a company. With a mortgage bond, the company pledges specific assets as a collateral for the bond. The asset securing the bond is described in detail in the mortgage deed, which is a legal document giving the bondholder a lien on an asset. A company can use a specific asset as security for more than one bond issue. In the e...
Read more

Unsecured Bonds

-
Image
What are Unsecured Bonds? Unsecured bonds or debentures are bonds that are not backed by some type of collateral. In other words, the bond is only secured by the bond issuer’s good credit standing. There are no building, equipment, vehicles, or other assets backing up the bond. If the bond issuer defaults on the unsecured bond, the bond holders could receive nothing from their investment. They would be left up to the court system to sue the bond issuer for their investment.  A bond that has no specified source of collateral is considered an unsecured debt instrument. Therefore, unsecured debt often pays higher yields than secured debt due to lack of a direct collateral coverage. There are three types of unsecured debt: debentures, Income bonds and subordinated debentures. Debentures A debenture is a type of bond that does not use collateral. It's otherwise recognized as any unsecured long-term debt. Because the bonds are unsecured, it's imperative for the issue to be profitable...
Read more

Constant-Growth Model

-
Image
Constant-Growth Model The most widely cited dividend valuation approach, the constant-growth model, assumes that dividends will grow at a constant rate, but a rate that is less than the required return. The constant-growth model is commonly called the Gordon model. The Gordon Growth Model – otherwise described as the dividend discount model – is a stock valuation method that calculates a stock’s intrinsic value. Therefore, this method disregards current market conditions. Investors can then compare companies against other industries using this simplified model. The Gordon Growth Model (GGM) is used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate. It is a popular and straightforward variant of the dividend discount model (DDM). The GGM assumes that dividends grow at a constant rate in perpetuity and solves for the present value of the infinite series of future dividends. Because the model assumes a constant growth rate, it i...
Read more